The Graph You Really Need When Watching the Republican (and Democratic) Conventions

Wednesday, 29 August 2012 05:17

Ezra Klein gives us a graph from the Center on Budget and Policy Priorities that shows the ratio of debt to GDP from 2001 to 2019. The graph attributes the rise in the debt to various causes. The Bush tax cuts and the wars in Iraq and Afghanistan are shown to be major culprits.

There actually is a much better graph that people can use. This is the graph showing interest on the debt as a share of GDP.

Source: Congressional Budget Office.

Note that this one looks considerably less scary. We don't get back to the same devastating interest burdens we faced in the early 90s until 2019. Yes folks, that was snark. Unless I've gone senile the interest burden we faced in the early 90s did not prevent us from having a decade of solid growth and low unemployment at the end of the period.

Am I pulling a fast one here by switching from debt to interest payments? Not at all. Suppose we issue $4 trillion in 30-year bonds in 2012 at 2.75 percent interest (roughly the going yield). Suppose the economy recovers, as CBO predicts, and the interest rate is up around 6.0 percent in 4-5 years. The federal government would be able to buy back the $4 trillion in bonds it had issued for roughly $2 trillion, immediately eliminating $2 trillion of its debt. This will make those who fixate on the debt hysterically happy, but will not affect the government's finances in the least. It will still face the same interest obligation.

The point here is that the fixation on the debt by both parties has paralyzed economic policy so that tens of millions of people are now being needlessly forced to suffer the effects of unemployment. We need graphs that focus on the economy, not silliness that distracts from real issues in order to assign partisan blame. (Yes, the Bush tax cuts were stupid and the wars should not have been fought, but they did not get us in this mess.)

Thanks for putting up a graph that displays the actual burden of interest rates.

Your graph surely makes one realize that we have been in an unusual interest rate environment since just before the collapse of the stock bubble in 2000.

I am puzzled as to why you included the forecast of interest rates from 2012 through 2020.

+3

This is projected burden, not projected interest rateswritten by Justafed,
August 29, 2012 8:25

In response to Ron Alley. As the title of the graph says, this is "interest as a percent [sic] of GDP". (Maybe it would have been clearer to say "percentage"?)

In any case, I am a bit surprised Dean Baker chose to highlight this point after having convinced me that growth in the future could well be slower given that there is no miraculous housing recovery to be expected. Why is CBO so optimistic about faster growth? Or does it matter that much if growth is slower since interest rates are therefore also likely lower? The back of my envelope is confusing me a bit at this point.

"We use the word percent as part of a numerical [removed]e.g., Only two percent of the students failed.). We use the word percentage to suggest a portion (e.g., The percentage of students who fail has decreased.)."

Each data point represents a percentage, such as two percent. Since the distinction is blurry, it has become common to just use the word "percent" in any case.

+0

...written by AndrewDover,
August 29, 2012 9:25

1) I agree with Ron that a chart that mixes actual interest burden up to now, with PROJECTED interest burden until 2020, can be misleading. Those projections typically include rising interest rates. It is entirely possible that interest rates stay about the same for the next 5 years.

2) It should be understood that the federal government currently is borrowing with a weighted average maturity of 64.2 months, or a bit over 5 years. The principal value of a 5 year bond will not drop 50% if interest rates double. And since over 25% of Federal borrowing is less than 1 year, rising interest rates will change the interest burden fairly quickly.

3) The purpose of a monetary system is to guide resources into their best use. 8% unemployment implies wasted resources, and calls for intervention by society to apply those resources. If that means an increaded debt burden in the short term, so be it. Long term we should bring taxes back into balance with Govt spending.

The interest payments issue is one I don't quite understand. Could someone explain/provide a link to explain the ".. federal government would be able to buy back the $4 trillion in bonds it had issued for roughly $2 trillion, immediately eliminating $2 trillion of its debt" comment?

to understand that the US govt issues its own currency. It doesn't really "borrow" money, some private sector dollar balances are switched to treasuries balances, while the govt's account increases an equal amount, big whoop, the fed can transfer these treasuries balances back to dollar balances anytime it likes, and the interest on the bonds the fed would now hold goes back to the treasury. There's no such thing as not being able to 'pay back' the 'debt'. Tell me, when a govt issues its own currency, what's the difference between a dollar and a treasury, besides the interest rate and maturity? (the govt doesn't actually even need to issue bonds for interest rate maintenance, there's other methods)....

+2

Jsanto ---written by Joe,
August 29, 2012 12:48

Check this out http://pragcap.com/understandi...ive-easing QE is just an asset swap, the fed "buys" bonds and gives reserve balances for them. Now that the fed has those bonds on its books, the interest on them is return back to the treasury, google "Fed Turns Over $77 Billion in Profits to the Treasury". The govt basically pays interest to itself when the fed holds the bonds. I'm not sure as to the mechanism for retiring these bonds, the treasury could easily mint a coin for the amount and just get them off the fed's books. Keep in mind, the difference between treasuries and dollars is the interest rate and maturity, big whoopty doo.

+1

Few quick pointswritten by Dean,
August 29, 2012 1:51

The bond price is inversely related to the interest rate. When interest rates go up, bond prices go down. If the interest rate more than doubles, as CBO projects (here in DC, CBO is the word of God), then long-term bond prices will plummet. That means that if the goal is reducing the debt, then we can buy these bonds back at much lower prices than they were issued at, and thereby reduce the debt. It's silly, but it should make deficit hawks in Washington feel good.

Joe,

the government does really borrow in the sense that it issues bonds that it has an obligation on which to pay interest and principle. The Fed is run separately from the executive branch so the government does have to raise taxes or issue more bonds to pay interest. You may not like the Fed being run separately, but at the moment it is.

+0

For claritywritten by John Q,
August 29, 2012 5:53

(Yes, the Bush tax cuts were stupid and the wars should not have been fought, but they did not get us in this mess.)

By "this mess" I take it you mean the millions of unemployed, and that you're not referring to the annual deficit/growth of national debt which politicians (of both parties) so foolishly focus on.

+1

Seperate??written by Joe,
August 29, 2012 11:09

And the president picks the chairman, and profits from its treasuries portfolio go back to the treasury, completely independent? Ok, so it's kinda separate, but it's a creature of congress, it's as independent as we let it be, they didn't want to be audited but it happened anyways... No, the US doesn't really borrow in the same sense as a private individual. Yes they issue bonds, and the money from bond sales eventually goes to the treasury's account so they can write a check on it, but the whole notion of it being "borrowing" is senseless, kinda absurd really. Govt can create money (you've said that many times), but yet it has to borrow it back? Where would the citizens get the dollars to pay the taxes (that supposedly fund the federal govt) if the govt hadn't created them first?(maybe check out "hut tax") What do you think would happen if the federal govt ran a surplus for too many years in a row?

How could it be possible, even in principle, for the non-government sector to accumulate any dollar/treasuries savings without a federal govt deficit?

A dollar you earn is a dollar someone else spent. Follow it through to its logical conclusion.

+1

Interest Rate Riskwritten by James,
August 30, 2012 12:59

Yes bond prices move inversely to rates but 30-year LT T-bonds are callable by issuer without any penalty?

If not callable, investors would simply hold on to maturity.

If callable by U.S. Gov't, who investors would be willing to accept that kind of interest rate risk (30-years term with such yield) without sufficient compensating returns?

+1

Yes, the Mess is High Unemployment and People Retiring Without Moneywritten by Dean,
August 30, 2012 6:25

In response to John Q., i don't consider the budget deficits a mess, I was referring to the state of the economy. In response to James, bonds are sold in the market every day of the week. Nothing prevents the federal government from buying them up. I don't know the law on whether they can literally destroy the bond before its expiration date, but I assume we can agree that if the government owes $4 trillion on bonds that are in its possession, that it has no net debt as a result of this situation.

+0

...written by Thorstein,
September 03, 2012 1:14

Baker: "Unless I've gone senile the interest burden we faced in the early 90s did not prevent us from having a decade of solid growth and low unemployment at the end of the period."

Oh really? So, is it your contention that the general price level of assets today is, roughly speaking, just as affordable/cheap, just as unencumbered with debt, as they were in 1990, ennabling another round of credit-creation/levering-up?